The challenges faced by IT sector will shift our focus towards management commentary within the IT sector, providing insights into the current customer sentiments within BFSI and technology services. Additionally, there will be a keen interest in understanding the demand scenario unfolding in the key markets of the United States and Europe.
Indian IT companies are anticipated to reveal a subdued performance in the third quarter, marked by higher-than-usual furloughs impacting revenue growth, caution industry observers. Despite expectations for unchanged demand outlook commentary, clients remain focused on scrutinizing discretionary spends and emphasizing cost optimization.
In the upcoming week, major tech giants, including Tata Consultancy Services (TCS) and Infosys on January 11 (Thursday), and Wipro and HCL Technologies on January 12 (Friday), are set to disclose their financial results for the December quarter.
Management commentary from these IT companies will be closely watched, particularly regarding prevailing customer sentiments in BFSI and technology services, as well as the demand scenario in key markets such as the US and Europe.
“We anticipate IT companies reporting a soft quarter-on-quarter constant currency revenue growth in Q3FY24 due to higher-than-usual furloughs across our coverage universe. Margin impacts are expected due to furloughs and wage hikes (implemented by Infy, Wipro, HCLT),” stated ICICI Securities in its Q3FY24 results preview.
Despite recent commentary from the US Fed easing macro uncertainty, signs of improvement in IT spending in the near term are elusive. ICICI Securities notes a slower pace of recovery in FY25 than earlier envisioned, prompting a 2-4 per cent cut in FY25/26 revenue growth estimates for covered companies. Thus IT sector overcame these challenges.
Challenges and Contractions: Q3FY24 Outlook for IT Services Amidst Furloughs and Economic Headwinds”
The forecast for tier-1 IT services indicates quarter-on-quarter growth between -2.6 per cent and 5 per cent, while tier-2 players are projected to see 1 per cent to 3 per cent sequential growth. The expectation is for lower sequential revenue growth in Q3FY24 compared to Q2, influenced by headwinds from increased furloughs, especially in BFSI and hi-tech, along with continued cuts in discretionary spending.
ICICI Securities anticipates the revenue growth gap between large-cap and mid-cap IT firms to narrow in Q3FY24, with mid-cap IT having higher exposure to BFSI and hi-tech, sectors impacted by higher-than-usual furloughs in December 2023 to overcome these challenges.
Motilal Oswal Financial Services, echoing a muted Q3 outlook, highlights that the weakness in IT services demand is further intensified by higher-than-expected furloughs. Seasonality is expected to impact the revenue growth and margin performances of both tier-1 and tier-2 IT companies.
The industry continues to experience a pause in discretionary spending across enterprises, despite improved sentiment. Motilal Oswal projects a median revenue growth of 0.7 per cent QoQ/2.5 per cent YoY in 3QFY24 within its IT services coverage universe.
While the banking and financial services and hi-tech sectors are likely to face adverse impacts, other verticals are expected to deliver muted performances. The report notes no significant signs of demand recovery in key geographies like the US and Europe, as clients exercise caution and reprioritize spending.
Motilal Oswal points out that a combination of adverse macros and a higher-than-expected number of furloughs has extended deal closure timelines and execution across companies, resulting in slower revenue conversion in the third quarter. It forecasts Tier-I companies’ revenue growth to be in the range of -2.7 per cent to +4.5 per cent QoQ in constant currency terms, while Tier-II players are expected to see growth between -4.4 per cent and +3.0 per cent QoQ in constant currency terms.
